FINC20018: Investment Analysis Report on Wools-Worth Limited

This report provides a detailed investment analysis of Wools-Worth Limited, a company listed on the Australian All Ordinaries index. The analysis begins with an assessment of shareholder value creation, utilizing gross profit ratio, net profit ratio, and return on assets to demonstrate the company's financial performance. The report then evaluates the return and volatility of the stock over 1, 2, and 5-year time horizons, discussing factors that influenced the stock's performance, including competition and mergers. The core of the report involves a stock valuation using a discounted cash flow (DCF) technique, incorporating assumptions for earnings per share, dividends per share, return on equity, growth rate, and required return. Based on the DCF analysis, the intrinsic value of the share is calculated and compared to the current market price to determine if the stock is undervalued or overvalued. The report also examines the company's dividend policy, noting its progressive dividend approach and the capital structure of the company, including debt-to-equity and debt-to-asset ratios. The conclusion summarizes the key findings, highlighting the company's value-generating capabilities and investment potential.

Running head: INVESTMENT ANALYSIS
Investment Analysis
Name of the Student:
Name of the University:
Author Note:

1INVESTMENT ANALYSIS
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Shareholder value created by the company:...........................................................................2
Analysis of Return and Volatility of the Stock:.....................................................................5
Valuation of the Stock Price of the company:.......................................................................7
Dividend Policy of the Company:..........................................................................................9
Capital Structure of the company:........................................................................................10
Conclusion:..............................................................................................................................11
References:...............................................................................................................................13

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Introduction:
The role of a financial analyst is to provide investment opportunity for the clients by
analysing companies which are trading at the stock exchange. The analyst role is to analyse
various factors for a company to arrive at a suitable recommendation for its investors. The
analyst looks at the value which has been maximized for the stakeholders over the years.
Thus a company which maximizes return or value for the stakeholders is a suitable
investment for the investors. The analyst also analyses the return which has been provided by
the stock of the company over various time horizon. This enables the analyst to understand
the fundamentals which affect the stock price of the company. This can be due to various
events and news which is related to the company. The analyst analyses the valuation of the
company to calculate the intrinsic value of the shares and determine the price at which the
stock should be trading at the market. The capital structure of the company also plays an
important role to assess the risk which is being undertaken by the shareholders of the
company (www.afr.com).
Thus all this analysis is conducted and a report is being provided below by taking the
company Wools-Worth Limited. The company Wools-Worth is a company which is listed in
the All Ordinaries index in Australia. The company belongs to the consumer’s discretionary
sector in Australia and operates a chain of supermarkets from the past two decades (Battersby
L).
Discussion:
Shareholder value created by the company:
The shareholder value which is created by the company can be assessed by two
methods, the first being to analyse the share value which has been created by the company.

3INVESTMENT ANALYSIS
The other being analysing the ratios of the company to assess the value which is being
created by the company (finance.yahoo.com).
2017 2018 2019
28.30%
28.40%
28.50%
28.60%
28.70%
28.80%
28.90%
29.00%
29.10%
29.20%
Gross Profit Ratio
Figure 1: Gross Profit Ratio
Source: By the Author
Thus the company Wools Worth has an increasing trend of the gross profit ratio, thus
it highlights the better management of the company. This graph implies that the company has
been able to increase its sales at a higher cost, while reducing the cost of the products being
sold. Thus, highlighting the creation of value for the shareholders (Campbell, D'Adduzio
Downes & Utke 2019).

4INVESTMENT ANALYSIS
2017 2018 2019
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
Net Profit Ratio
Figure 2: Net Profit Ratio
Source: By the Author
Thus as the company has increased the gross profit ratio, by reducing the cost of the
goods which are sold. The company has an increased net profit which is due to the reduction
in the administrative and selling expense. The company has also reduced its interest expense
by paying of some of the debt which had been taken by the company (Wen & Zhu 2019).
2017 2018 2019
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Return on Assets
Figure 3: Return on Assets

5INVESTMENT ANALYSIS
Source: By the Author
This ratio highlights the effective use of the assets which is purchased by the company
for its operations. Thus, this ratio has been in the upward trend highlighting that the company
has been efficiently using the assets and thus creating value for the stakeholders (Easton &
Sommers 2018).
Thus upon analysing the three ratio it is being highlighted that the company has been
generating value for the shareholders and stakeholders. This is by reducing the cost for the
products which are sold, by reducing the expense on interest expense and also by efficiently
managing the assets which the company has purchased for its operation (Aman, 2016).
Analysis of Return and Volatility of the Stock:
The return which is generated by a stock over various time horizon and the volatility
which the stock creates is being assessed by taking 1 year, 2 year and 5 year historical data on
the stock. Thus the analyst aims to analyse the return which has been provided by the stock in
the short term, medium term and long term. Thus this would help the analyst to provide
recommendation about the stock along with the time horizon (Patil & Mohanthy, 2017).
1 Year 2 Year 5 Year
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
Return and Volatility ( Monthly)
Average Monthly Monthly Volatility

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1 Year 2 Year 5 Year
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
Yearly Volatility and Return on the stock
Yearly Return Yearly Volatility
Figure 4:
Source:
The volatility of the stock in the past one year has been quite high, along with the
return which has been created for the stakeholders or investors. The return which the
company has provided to the stakeholders in the past one year has been quite high at around
42%. The stock prices started to rally for a fall since a German supermarket was planning to
open stores in Australia. Thus creating competition the share price of the company fell in the
later half on 2019, however, the share prices became volatile and rallied for an upward trend.
This is because the German supermarket has backed out from opening stores in Australia and
this news made the stock volatile. Thus the high volatility in the past one year can be
considered to this event. The reason for volatility can also be credited to the event of merger
of the liquor business with its hotel business. Thus this news also led to the volatility of the
stock in the past one year (Ardalan, 2017).
Thus as per the trend of returns of the stock price of the company Wool Worth’s the
medium term return provided by the company over the span of two years is 25.29%, with a
volatility of 18.01%. Also the long term return from the stock of the company is 10.97% with

7INVESTMENT ANALYSIS
a volatility of 16.28%. Thus over the short term horizon the company has provided an
abnormal return which gets reduced as the time horizon increases. The same trend has been
observed for the volatility of the stock which has reduced with the increase in the time
horizon for the company (Brusov, Filatova, Orekhova & Eskindarov 2018).
Thus the stock of Wool worth’s provides return with risk, thus this stock is suitable
for investors who are determined to generate greater return with higher level of risk (Yapa
Abeywardhana 2017).
Valuation of the Stock Price of the company:
The calculation of the intrinsic value of the share helps the analyst to provide
recommendation regarding to the stock. The valuation of the stock price can be conducted
using the relative valuation or absolute valuation approach. The relative valuation is the
analysis of the various financial metric’s ratio of the company, which helps analysis of the
share price of the company. Thus for the purpose of valuation the stock price of the company,
the absolute valuation is taken with the user of discounted cash flow technique. Thus the
assumption for the calculation of the stock price is provided in the figure and points below,

8INVESTMENT ANALYSIS
Figure 5:
Source:
Thus the assumption which are undertaken and the inputs which are required in the
discounted cash flow are provided in the points below,
 The earnings per share and dividends per share for the year 2019 is taken to calculate
the payout ratio and the retention ratio of the company.
 The return on equity is calculated using the net income for the year 2019 and the
value of shareholders equity in the year 2019. Thus the return on equity is calculated
by dividing the two factors.
 The growth rate for the company is calculated by multiplying the retention ratio with
the return on equity. Thus the growth rate is assumed to be 11.62% for the next 3
years, while the growth rate in 2022 is expected to be 6%.
 The required return on equity is calculated using the capital asset pricing model. The
beta is calculated by using the 5 year historical share price data and the all ordinaries

9INVESTMENT ANALYSIS
index data. The value of the beta of the company is 0.79, and the required return for
the company is 16.8%. The market return is the average return of the all ordinaries
index and the risk free rate is taken from the 15 year Australian government bond.
 The tax rate for the company is 30%, which is taken from the balance sheet of the
company.
Thus the following assumptions and data have been taken for the calculation of the
intrinsic value of the share.
Figure 6:
Source:
The free cash flow for the company is calculated from the year 2016 to the year 2022
using the data and the assumptions taken. Thus the cash flows from the year 2019 to 2022 are
taken for the valuation of the stock price of the company. The discount rate is taken and used
to discount the free cash flow of the company. The terminal value is calculated and added to
the cash flow of the year 2021, and is used in the calculation of the enterprise value of the
company which is at $ 70515742. Thus the debt which is outstanding with the company is
deducted from the enterprise value to get the value of the shareholders which is at
$57693741. The outstanding equity shares which are at the number of 1300500 are used to

10INVESTMENT ANALYSIS
divide the shareholder’s value to derive the price per share which is at $44.36 (Onatca Engin,
Unver Erbas & Sokmen, 2019).
The current price of the share on 30th January 2020 is $41.44, while the intrinsic value
of the shares is at $44.36 the shares of the company is undervalued. Thus the investors should
buy the shares as the intrinsic value of the shares is greater than the current value of the stock
trading at the exchange (Michaely & Qian 2017).
Dividend Policy of the Company:
The dividend policy is an important factor which provides a signal to the investors
about the future prospects of the company. This is because a company pays dividend out of
the profits which it has earned in a financial year. Thus, if a company which has been paying
high dividend lowers its dividend it highlights to the market that the future prospects of the
company have vanished hence the company is reducing dividend. This leads to a fall in the
shares price of the company as investors lose faith in the company (Jacob & Michaely 2017).
2015 2016 2017 2018 2019
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Dividends
Figure 7:
Source:

11INVESTMENT ANALYSIS
The dividend which has been paid by the company in the year 2015 is highest, and the
dividend had fallen from the next year onwards in the year 2016. The company has been
following the progressive dividend from the year 2016 as the dividend amount has been
rising in proportion with the rise in the net income of the company. However, the company
should not raise its dividends to a very high level, since if there is a reduction in profits in any
financial year it would be difficult for the company to maintain the dividends (He, Ng, Zaiats
& Zhang 2017).
Capital Structure of the company:
The capital structure of a company is an important element which needs to be
considered by the shareholders, since the higher the amount of debt the greater the risk is
taken by the company. Thus the capital structure analysis of the company wool worth’s is
being taken the ratio of the company debt, equity and assets. The ratios which have been
calculated have been provided in the figure below,
Figure 8:
Source:
The debt to equity ratio of the company has been falling over the years, highlighting
the reduction in the level of debt of the company and rise in the level of equity. Also on a

12INVESTMENT ANALYSIS
similar note the debt to asset ratio of the company is also falling highlighting the reduction in
debt of the company and a rise in the level of assets of the company (Jabbouri 2016).
Thus the capital structure of the company which was risky in the past is improving
and thus reducing the level of risk for the stakeholders of the company.
Conclusion:
Thus in the above report a complete analysis of the risk return profile of the company
wool worth’s is conducted and the stock being suitable for investment recommendation is
provided. The company has been creating value for the stakeholders which has been
highlighted by the rise in the ratio. The return which the company has provided in the short
term also tends to highlight the investment opportunity which the stock provides to the
investors. The dividend policy which is followed by the company is progressive, thus a rise in
dividend or a stable dividend is expected in the future. The capital structure of the company is
improving with the reduction in debt and rise in the level of equity.
Thus upon analysing the above factors, it is recommended that the stock is suitable to
be bought both for the short term as well as long term.

13INVESTMENT ANALYSIS
References:
Aman, S. M. (2016). Analysis of financial statements using ratio analysis for the last 5 years.
Ardalan, K. (2017). Capital structure theory: Reconsidered. Research in International
Business and Finance, 39, 696-710.
Battersby, L. (2020). Full steam ahead as ASX smashes new records. Retrieved 30 January
2020, from https://www.smh.com.au/business/markets/full-steam-ahead-as-asx-smashes-
new-records-20200122-p53tsk.html
Battersby, L. (2020). Full steam ahead as ASX smashes new records. Retrieved 30 January
2020, from https://www.smh.com.au/business/markets/full-steam-ahead-as-asx-smashes-
new-records-20200122-p53tsk.html
Battersby, L. (2020). Full steam ahead as ASX smashes new records. Retrieved 30 January
2020, from https://www.smh.com.au/business/markets/full-steam-ahead-as-asx-smashes-
new-records-20200122-p53tsk.html
Brusov, P., Filatova, T., Orekhova, N., & Eskindarov, M. (2018). New meaningful effects in
modern capital structure theory. In Modern Corporate Finance, Investments, Taxation and
Ratings (pp. 537-568). Springer, Cham.
Campbell, J. L., D'Adduzio, J., Downes, J., & Utke, S. (2019). Do Investors Adjust Financial
Statement Ratios when Financial Statements Fail to Reflect Economic Substance? Evidence
from Cash Flow Hedges. Evidence from Cash Flow Hedges (April 2019).
Easton, M., & Sommers, Z. (2018). Financial Statement Analysis & Valuation, 5e.

14INVESTMENT ANALYSIS
Free to grow: Woolworths' pitch for demerger. (2019). Retrieved 30 January 2020, from
https://www.afr.com/companies/retail/free-to-grow-woolworths-pitch-for-demerger-
20191009-p52z78
He, W., Ng, L., Zaiats, N., & Zhang, B. (2017). Dividend policy and earnings management
across countries. Journal of Corporate Finance, 42, 267-286.
Jabbouri, I. (2016). Determinants of corporate dividend policy in emerging markets:
Evidence from MENA stock markets. Research in International Business and Finance, 37,
283-298.
Jacob, M., & Michaely, R. (2017). Taxation and dividend policy: the muting effect of agency
issues and shareholder conflicts. The Review of Financial Studies, 30(9), 3176-3222.
Michaely, R., & Qian, M. (2017). Stock liquidity and dividend policy: Dividend policy
changes following an exogenous liquidity shock. Available at SSRN 2894164.
Onatca Engin, S. N., Unver Erbas, C., & Sokmen, A. G. (2019). Pecking Order Theory in
Determining The Capital Structure: A Panel Data Analysis Of Companies in
Turkey. Business and Economics Research Journal, 10(3), 687-698.
Patil, D., & Mohanthy, J. N. (2017). Analysis of Financial Statements in the Sugar
Industry. Available at SSRN 2962855.
Wen, H., & Zhu, T. (2019). Interpretation of Financial Statements.
Yahoo is now part of Verizon Media. (2020). Retrieved 30 January 2020, from
https://finance.yahoo.com/quote/WOW.AX/balance-sheet?p=WOW.AX
Yapa Abeywardhana, D. (2017). Capital structure theory: An overview. Accounting and
finance research, 6(1).

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